Insuring your way to a better deal

19 October 2017

With real estate investment in Europe having risen by 25% to EUR 74 billion by the second quarter of this year, it is even more important that investors are alive to the developments within merger and acquisition (M&A) insurance and how these products are being used to strategically facilitate and enhance deals.

Whilst these M&A products are not new, increasing competition and broker specialism has seen rapid development and improved process efficiencies resulting in a circa quadrupling growth in demand in the last six years.

The real estate sector leads the pack in the use of these products and it is now commonplace to see the underlying transaction structured around the use of insurance with the seller retaining no, or only nominal, liability post-completion. This has enabled investment funds to return dividends without holdback for potential warranty claims and has also facilitated fund liquidation.

Typical insurances taken out on real estate deals include:
  • Warranty & Indemnity (W&I)- insurance to protect against unknown breaches of warranties in the sale agreement.
  • Tax- insurance to ring fence against identified potential tax liabilities e.g. Stamp Duty Land Tax (SDLT) and VAT matters.
  • Environmental- insurance including cover for legal liability and the clean-up costs associated with pollution.
  • Title Top-Up- insurance cover for breaches of fundamental warranties up to 100% of enterprise value (EV).
This increased demand for these products has led to huge growth in capacity (circa five times that available six or seven years ago), such that it is possible to pull together well over USD 1 billion in policy limit for any one transaction. This growth has resulted in downward pressure on both pricing and policy excess levels.

JLT’s M&A Index has tracked this downward trend over the last three years:

Global Real Estate Deals (excluding North America)

Real estate M&A

It is interesting to compare this data with UK real estate deals only, where the impact of Brexit can be clearly seen in 2016, as can the abundant availability of nil policy excess options.

UK Real Estate Deals

Real estate M&A

This overall rating reduction is all the more noteworthy as we are starting to see insurers include cover for certain low-risk tax exposures, which may previously have been excluded and/or charged for separately under specific tax policies.

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For more information contact Oliver Jackson, Account Executive on +44 20 7558 3467 or email oliver_jackson@jltgroup.com